Exclusive: National Security Agency helps banks battle hackers (Reuters)

WASHINGTON (Reuters) – The National Security Agency, a secretive arm of the U.S. military, has begun providing Wall Street banks with intelligence on foreign hackers, a sign of growing U.S. fears of financial sabotage.

The assistance from the agency that conducts electronic spying overseas is part of an effort by American banks and other financial firms to get help from the U.S. military and private defense contractors to fend off cyber attacks, according to interviews with U.S. officials, security experts and defense industry executives.

The Federal Bureau of Investigation has also warned banks of particular threats amid concerns that hackers could potentially exploit security vulnerabilities to wreak havoc across global markets and cause economic mayhem.

While government and private sector security sources are reluctant to discuss specific lines of investigations, they paint worst-case scenarios of hackers ensconcing themselves inside a bank's network to disable trading systems for stocks, bonds and currencies, trigger flash crashes, initiate large transfers of funds or turn off all ATM machines.

It is unclear if hackers have ever been close to producing anything as dire, but the FBI says it has already helped banks avert several major cyber attacks by helping identify network vulnerabilities.

NSA Director Keith Alexander, who runs the U.S. military's cyber operations, told Reuters the agency is currently talking to financial firms about sharing electronic information on malicious software, possibly by expanding a pilot program through which it offers similar data to the defense industry. He did not provide further details on his agency's collaboration with banks.

Alexander said industry and government were making progress in protecting computer networks, but "tremendous vulnerabilities" remained. The four-star Army general noted companies that have suffered damage from hackers, such as Google Inc, Lockheed Martin Corp and Nasdaq OMX Group, had among the best security systems in the world.

"If they're getting exploited, what about the rest? We have to change that paradigm," Alexander said.

NSA, which has long been charged with protecting classified government networks from attack, is already working with Nasdaq to beef up its defenses after hackers infiltrated its computer systems last year and installed malicious software that allowed them to spy on the directors of publicly held companies. A Nasdaq spokesman confirmed the investigation into the attack continues, but declined to give further details.

OFFICIALS WORRIED

Hackers have targeted Wall Street investment banks for more than a decade, but recent attacks have been more sophisticated, coordinated and deliberate.

That makes security experts suspect the hackers were backed by countries such as China, and fueled concerns that cyber terrorists might someday use malware to wipe out crucial data and cripple networks across the financial sector.

China has repeatedly said it does not condone hacking, but experts say the evidence continues to mount against Beijing. In June, Google blamed China for an attempt to steal the passwords of hundreds of email account holders, the second major breach the Internet giant has blamed on the Chinese.

Earlier this year, security firm McAfee said hackers working in China broke into the computer systems of five global oil and gas companies to steal bidding plans and other critical proprietary information.

"We know adversaries have full unfettered access to certain networks," Shawn Henry, executive assistant director of the FBI, said without identifying the adversaries.

"Once there, they have the ability to destroy data," he said in an interview. "We see that as a credible threat to all sectors, but specifically the financial services sector."

The FBI has helped banks avert several potential attacks by alerting them to vulnerabilities in their computer networks, and by flagging possible hackers before they struck, he said.

Security experts interviewed by Reuters declined to identify any banks that may have data compromised, citing promises of confidentiality to clients, colleagues and employers that they would not to discuss the matter publicly.

Representatives of Wall Street's biggest banks including Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc and JPMorgan Chase & Co either declined to discuss security issues or were not available to comment.

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Exclusive: Democrats seek up to $3 trillion budget savings (Reuters)

WASHINGTON (Reuters) – Democrats are proposing up to $3 trillion in measures to slash the U.S. budget deficit, including revenue increases and significant cuts to the Medicare health insurance program for the elderly.

The plan was unveiled on Tuesday at a closed-door meeting of a 12-member congressional panel -- the so-called "super committee" that is assigned the task of finding at least $1.2 trillion in deficit reduction over 10 years, congressional aides told Reuters.

It was the first formal proposal by Democrats on the committee and is aimed at galvanizing closed-door talks that are quickly running up against a November 23 deadline.

The plan proposes cutting the deficit by $2.5 trillion to $3 trillion through a roughly equal mix of spending cuts and revenue increases.

It calls for between $200 billion and $300 billion in new economic stimulus spending that would be paid for with lower interest payments from reducing deficits.

It also seeks around $400 billion in Medicare savings, with half coming in benefit cuts and the other half in cuts to healthcare providers. Details of that proposal were scant but tackling the popular Medicare program is always politically risky for politicians.

The congressional aides were not immediately able to say how the revenue increases would be achieved.

One of the congressional aides noted that parts of the Democrats' proposal are similar to long-term spending cuts that President Barack Obama discussed with House of Representatives Speaker John Boehner, the top Republican in Congress, a few months ago when they were struggling to get a "grand bargain" to raise the U.S. debt ceiling.

Those talks faltered and the White House and Congress ended up agreeing to a smaller, $917 billion deficit-reduction package that also raised the U.S. borrowing authority and averted a government default on its debt.

One of the congressional sources said Republicans on the committee did not react favorably to the new Democratic plan.

Republicans have long been opposed to more economic stimulus spending and increasing revenues in deficit-reduction efforts.

RATING AGENCIES WATCHING CLOSELY

But with U.S. budget deficits topping $1 trillion annually, ratings agencies are watching closely for how the committee advances toward a credible long-term solution to restore the U.S. fiscal health.

Standard & Poor's cut the U.S. AAA rating by one notch in August after the fractious negotiations between Republicans and Democrats on raising the debt ceiling failed to agree on a comprehensive deal.

Rating agencies say Washington needs to find a total of about $4 trillion in savings, including the amount agreed to in August. That total is far beyond the $1.2 trillion minimum the super committee must find by November 23.

The congressional aides did not say why Democrats were proposing such a big deal, but Democratic congressional leaders have repeatedly called on the committee to go beyond its mandate to fix the country's fiscal mess.

While sources portrayed the proposal as a Democratic plan, they also noted that at least one Democrat on the super committee, Representative James Clyburn, had reservations about the move to cut Medicare spending.

(Editing by Will Dunham)

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Exclusive: Facebook seeks exec to build Hollywood, media ties (Reuters)

SAN FRANCISCO (Reuters) – Facebook is looking to hire a big-name executive to cultivate relationships and strike deals with the film and music industries to bolster its media offerings.

In recent months, Facebook had discussions with former MySpace co-President and former MTV executive Jason Hirschhorn about a job spearheading the company's outreach to media companies, according to several people familiar with the situation.

While the talks do not appear to have gone anywhere, and it wasn't clear whether Facebook had approached others about the position, the efforts signal Facebook's intention to take a more hands-on approach in helping media companies bring their content to the social network.

"They had held the media industry at arm's length for a while. It was: 'We are a platform, come use us all you want but we don't necessarily need to partner with you.' But now the attitude has changed," said one of the people familiar with the situation.

"They realize that one of the next phases in its evolution is to work with the media companies," the person added.

Facebook and Hirschhorn both declined to comment.

Facebook's media push comes as the company faces fresh competition from Google Inc, which launched a rival social networking service in June.

Twitter recruited former Creative Artists Agency executive Omid Ashtari to be its "L.A. person" last November, according to a report in AllThingsD.com, and the company recently appointed Chloe Sladden to a new role overseeing content and programing efforts.

"The view is they're looking at Twitter and Google and their outreach to the media community and they don't want to fall behind the curve," the source said. "They don't want the media companies to think they're uninterested."

Facebook has gradually gotten closer to the media world, with Chief Operating Office Sheryl Sandberg joining the Walt Disney Co board of directors in December 2009, and Netflix Inc Chief Executive Reed Hastings taking a seat on Facebook's board in June.

Several movie studios have released movies that can be rented and viewed on Facebook this year, including Warner Brothers' "Dark Knight" and Universal Pictures' "Big Lebowski."

Facebook was aggressively exploring recruiting a media point-person a few months ago, but has since shifted its attention to other strategic priorities, the sources said. But with the company increasingly interested in making media a key part of the social network, people expect the search to pick up again soon.

THE GAMING LESSON

Facebook's media ambitions will be on display on Thursday at its annual developer conference in San Francisco, where the company is expected to unveil new music features.

The music platform will integrate streaming music services from companies including Spotify, Rhapsody and Rdio, directly into users' home pages, said several other people familiar with the situation. Facebook users who subscribe to the music services will be able to share songs and playlists with each other and see what their friends are listening to, the people said.

Facebook will also unveil new flavors of its "Like" button at the event, allowing users to flag Web pages or other online content with specific recommendations, such as "Read," "Watched" or "Listened," according to a source with knowledge of the matter.

For Facebook, building a deeper integration with music, movies and other media into its service makes it more likely that users will spend more time on its site, allowing the company to generate more advertising dollars.

Media also fits well with Facebook Credits, the payment system that Facebook has introduced for its users to buy digital goods on its site. Facebook takes a 30 percent cut of transactions using Facebook Credits.

The template for Facebook's media push is social games, which more than 200 million of its users play on the website every month. Companies like Zynga and Electronic Arts Inc's Playfish have built successful businesses developing social games that can be played on Facebook.

But recreating that magic with the media industry could be trickier.

While technology-savvy social game companies are adept at quickly creating products that shine on various "platforms," such as social networks or smartphone applications, traditional content providers don't possess the same kinds of expertise, said another person familiar with the situation.

"You can't just drop platforms in Hollywood," the person said.

"They make content well," he said. But, he noted, creating media that really shines on a social networking platform requires hand-holding.

(Reporting by Alexei Oreskovic; Additional reporting by Peter Lauria and Yinka Adegoke in New York; Editing by Richard Chang)

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Exclusive: Holiday shoppers plan to spend less this year (Reuters)

NEW YORK (Reuters) – Most Americans expect to spend less or the same on the holidays this year compared with last year, a survey showed on Monday, an early sign that retailers will have to try harder to win shoppers in the biggest selling season of the year.

A whopping 82 percent of those surveyed by America's Research Group said they planned to spend less or the same as last year. Consumer spending accounts for almost 70 percent of the U.S. economy.

The question was one of several asked exclusively for Reuters as part of a larger America's Research Group survey.

More than half of those surveyed said they expected the economy to slow further before it recovers. About 51 percent said they did not feel better about their family finances versus a year earlier.

"Retailers better be worried about Christmas. If half of Americans believe it is going to be worse before it gets better, they may not be too excited about buying much this Christmas season," Britt Beemer, president of America's Research Group, said in an interview.

The holiday selling season is vital for U.S. retailers as many of them make as much as a third of their annual sales in that period.

"This is not the kind of number that retailers want to have going into November 1 or they are going to be in big trouble," Beemer said. "They are going to have to give consumers better deals earlier."

Fewer pay raises, falling home values, rising prices for food and other goods, and political gridlock in Washington are all taking a toll on Americans, Beemer said.

"Not that there is no hope at the end of the tunnel, but the light is very, very dim," he said.

Post-recession American shoppers are extremely sensitive to price and increasingly venturing beyond discount chains while hunting for bargains.

About 68 percent of those surveyed said they have now started shopping at dollar stores; 42 percent said dollar stores offered better value than discounter Wal-Mart Stores In.

That is bad news for mass merchandisers such as Wal-Mart, Target Corp, Family Dollar Stores Inc and Dollar General Corp.

"Anybody who is another discounter that sells commodities is vulnerable," Beemer said. "Dollar stores are attacking them at their lowest price level."

The telephone survey of 1,000 consumers was conducted September 6-8 and has an error factor of plus or minus 3.8 percentage points.

(Reporting by Dhanya Skariachan; editing by John Wallace)

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Exclusive: Stark to leave ECB over bond-buying row (Reuters)

FRANKFURT (Reuters) – European Central Bank Executive Board member Juergen Stark is resigning his post in what sources say is a protest against its policy of buying bonds to help troubled euro zone debtor states.

A euro zone central bank source said Stark was at angry at being passed over when Bundesbank chief Axel Weber quit earlier this year, clearly unhappy with the ECB bond-buying program, and also felt the departure of ECB President Jean-Claude Trichet next month would mark the end of an era at the ECB.

Stark's decision to announce his departure now, rather than in a couple of months, was designed not to make it look like he was resigning because Italian Mario Draghi is succeeding Trichet from November 1, said the source.

News of Stark's shock departure highlights the size of the split at the ECB over the bond-buy plan and the extreme tension between its members, who have been at the center of the policy response to the euro zone debt crisis.

Stark is one of the most experienced policymakers at the ECB, a young institution facing the impending retirement of Trichet and uncertainty about how it will be led by Draghi, whose country is embroiled in the euro zone debt crisis.

Stark and Bundesbank head Jens Weidmann both opposed the ECB's decision last month to reactivate its bond plan following a 19-week pause. The bank decided to buy the bonds of Italy and Spain after they came closer to succumbing to the debt crisis.

The ECB has faced sharp criticism in Germany for buying bonds -- a move many here see as taking the bank into the fiscal arena and threatening its core role of fighting inflation.

The ECB confirmed Stark would be the second German policymaker to leave the bank this year after Weber quit in February, also in protest at the bond program.

"This is remarkable," said Manfred Neumann, emeritus economics professor at Bonn University and former thesis adviser to Weidmann.

"Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president. It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB."

The ECB said Stark had resigned for personal reasons but two other sources told Reuters it was related to the bond-buying that has rescued Italy and Spain from crisis over the past month.

The euro, European and U.S. stock markets fell in response. Bond yield spreads, though, for Europe's struggling periphery were only slightly higher.

German Deputy Finance Minister Joerg Asmussen will replace Stark on the ECB's six-member Executive Board, a source familiar with the plan said.

"Asmussen will be more pragmatic," Bert Ruerup, former head of the 'wisemen' council of economic advisers to the German government told Reuters. "I don't think that he will fight as openly. This may calm down when the EFSF gets the power to buy bonds."

Asmussen has been a key figure in Germany's policy response to the euro zone debt crisis.

The ECB's policy orientation will not be altered by Stark's departure, Austrian ECB policymaker Ewald Nowotny said. German Finance Minister Wolfgang Schaeuble said he expected a German candidate to succeed Stark and that the successor would pursue the same policies of stability as Stark.

TEMPERS FRAY

News of Stark's departure came just a day after Trichet delivered an impassioned defense of the ECB's record and its handling of the euro zone debt crisis.

Trichet's emotional response to a question about calls from some in Germany for a return to the Deutschmark suggested tempers were running high at the bank.

German politicians immediately leapt on news of Stark's resignation to press for a change of direction at the ECB.

"His departure is a dramatic alarm signal which shows the ECB must correct its course," said Kurt Lauk, president of the economic council of Chancellor Angela Merkel's Christian Democrats.

"It is also a clear signal that the ECB must be freed from the role of aid provider that was foisted on it due to bad decisions by politicians," he added.

The ECB has been concerned that by buying the sovereign bonds of Italy -- the euro zone's third largest economy -- it is encouraging Rome to slacken efforts to shore up its finances, and has been irritated by flip-flopping over austerity measures.

However, Trichet said after the bank's policy meeting on Thursday that the latest decisions by the Italian government meant it was delivering on what it had promised.

Stark, 63, has been a member of the ECB's six-member Executive Board -- whose members form the Governing Council along with the 17 euro zone national bank chiefs -- since June 2006.

He holds the board's influential economics portfolio, a role that allows him to present a template of the ECB's monetary policy statement that forms a basis for the Governing Council's final view.

The ECB said Stark's successor would be appointed before the end of the year. Stark's term on the board was due to run until May 31, 2014.

In addition to Trichet and Stark, Lorenzo Bini Smaghi, another heavyweight ECB board member, is expected to leave the bank this year. Their departures leave the ECB without some of its most experienced policymakers while the euro zone crisis shows no sign of abating.

(Additional reporting by Marc Jones, Sakari Suoninen, Daniel Flynn and Noah Barkin; Writing by Paul Carrel; Editing by Ruth Pitchford/Mike Peacock)

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AP Exclusive: Japan nuke holdout resolved to stay (AP)

TOMIOKA, Japan – Vines creep across Tomioka's empty streets, its prim gardens overgrown with waist-high weeds and meadow flowers. Dead cows rot where they were left to starve in their pens. Chicken coops writhe with maggots, a sickening stench hanging in the air.

This once-thriving community of 16,000 people now has a population of one.

In this nuclear no-man's land poisoned by radiation from a disaster-battered power plant, rice farmer Naoto Matsumura refuses to leave despite government orders. He says he has thought about the possibility of getting cancer but prefers to stay — with a skinny dog named Aki his constant companion.

Nearly six months after Japan's catastrophic earthquake and tsunami, the 53-year-old believes he is the only inhabitant left in this town sandwiched between the doomed Fukushima Dai-ichi nuclear power station to the north and another sprawling nuclear plant to the south.

"If I give up and leave, it's all over," he told The Associated Press. "It's my responsibility to stay. And it is my right to be here."

Matsumura is an anomaly in a country where defiance of the government is rare and social consensus counts above everything else. Yet, Matsumura's quiet civil disobedience speaks loudly of the dilemma facing the more than 100,000 silent "nuclear refugees" who were displaced by the March 11 disaster.

Tokyo was quick to establish evacuation zones around the plant but has been slow to settle the refugees. A government order forbids them from going back to their homes in a half dozen towns around Fukushima Dai-ichi that were declared off-limits after the tsunami-stricken nuclear plant started spewing radioactivity.

"We are already being forgotten," said Matsumura, a leathery but clean-cut man with the sturdy build of a farmer. "The rest of the country has moved on. They don't want to think about us."

Tomioka's city hall has been moved to a safer city in Fukushima prefecture, where thousands of its residents live in makeshift shelters. Thousands more have scattered across the country.

The town itself is sealed behind police barriers, which hide the heart of the nuclear no-go zone, an area that is officially too dangerous for human habitation.

Officers are sent into Tomioka each day to search for burglars or violators of the keep-out order. By law, anyone caught inside the zone can be detained and fined.

But authorities mostly turn a blind eye to Matsumura, though he says he has been confronted by the police a few times. If there are other holdouts, they have escaped detection.

"Some people stayed behind, some stayed with me in my house," he said. "But the last one left a few weeks ago. He asked me to take care of his cats."

Tomioka official Tomio Midorikawa, who is in charge of the town's living and environment division, said the last resident was persuaded to leave in early August — the same time Matsumura claims his neighbor left. He was not aware of Matsumura.

Without electricity or running water, Matsumura fires up a pair of old generators each night and draws his water from a local well. He eats mostly canned foods, or fish that he catches himself in a nearby river. He said that once or twice a month, he makes his way to a city outside the zone in his mini pickup truck to stock up on supplies and gas.

He has taken it upon himself to tend to the town's abandoned cats and dogs, including the wolflike Aki.

"I've gone to Tokyo a couple of times to tell the politicians why I'm here," he said. "I tell them that it was an outrage how the cows were left to die, and how important it is for someone to tend to the family graves. They don't seem to hear me. They just tell me I shouldn't be here to begin with."

Matsumura said he did leave once, but the ensuing experience only strengthened his desire to return.

"I drove to a relative's house thinking I would stay there," he said. "But she wouldn't let me in the door, she was too afraid I was contaminated. Then I went to an evacuation center, but it was full. That was enough to convince me to come home."

The tsunami disaster left nearly 21,000 people dead or missing and touched off fires, explosions and meltdowns at the Fukushima nuclear plant. The amount of radioactive cesium released into the environment since has been estimated to be equal to 168 Hiroshimas, making it the worst atomic disaster since Chernobyl.

No one — including Matsumura — is suggesting the exclusion zone be lifted altogether. The connection between radiation and cancer or other health problems is well established, and experts agree it could be decades until the nuclear zone is safe. Some point to the example of Chernobyl, which 25 years later is still mostly void of human life.

"The contaminants will be there for decades, centuries, millennia," said Timothy Mousseau, a biologist with the University of South Carolina who has studied Chernobyl for more than a decade and recently returned from a preliminary research trip to Fukushima.

Even so, local authorities are increasingly frustrated with the lack of progress toward resolving the nuclear Diaspora.

Tamotsu Baba, the mayor of Namie, a partially evacuated town near Tomioka, said in an interview it was reasonable at first for Tokyo to establish a geometric ring extending outward from the center of the plant. But he believes data collected since should be used to fine-tune the exclusion area to reflect the actual amounts of contamination.

"We have invested millions in developing a system to measure radiation," he said. "But it is like the whole thing is being decided by someone behind a desk with a 500 yen ($5) compass."

Further fanning the anger among the displaced, compensation from the government and Tokyo Electric Power Co., the utility that runs the plant, has stalled in a bureaucratic labyrinth.

Before the crisis began, the average annual income in Tomioka was about 3.5 million yen ($35,000).

Matsumura said he has received about 1 million yen ($10,000) in compensation, far less than he would have earned from selling his rice and other produce. TEPCO, reeling financially from the accident, has put off a final decision on further compensation until the plant is stabilized. The money already handed out will be subtracted from the amount it eventually settles on.

Officials say some restrictions may be lifted by the end of the year if the Fukushima reactors are brought to a stable shutdown.

Beyond that, the future remains a mystery.

"There are many tasks ahead before we will be able to return to our town, including decontamination and the rebuilding of our sewage system, roads and infrastructure," Tomioka Mayor Katsuya Endo said in a recent post on the town's website. "But we must maintain our hope, and gradually move forward."

Matsumura now likens himself to the Japanese soldiers who refused to surrender until decades after the end of World War II.

As a heavy rain began to fall, he walked down an overgrown mountain path to his rice paddy. He pulled up a plant by its roots, twisted it between his fingers then tossed it into an irrigation ditch with a resigned sigh.

There will be no cash crop this year. Or maybe ever again.

"It was strange being alone at first, but I am resolved to stay," he said. "I'm getting used to this life."

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Exclusive: Finland wants Luxembourg agency to hold Greek assets (Reuters)

BRUSSELS (Reuters) – Finland has proposed that Greek state assets be transferred to a Luxembourg-based holding company and held as security for new loans to Athens, according to an internal document obtained by Reuters.

The proposal, drafted in June, remains a central plank of Finnish demands for collateral in return for providing more aid to Greece. Senior euro zone officials held another conference call on Monday to try to resolve the collateral issue.

If Finland does not get its way, it may pull out of the Greek bailout, unleashing renewed trouble in financial markets.

Although small at around 1.4 billion euros, Finland's share of the new support for Greece is important because its triple-A credit rating adds weight to the 109 billion euro rescue agreed on July 21, the second bailout package Athens has received.

Demands from Helsinki for collateral have sparked requests from countries including Austria, the Netherlands, Slovenia and Slovakia for similar treatment, and threaten to spoil the euro zone's attempt to save Athens from default.

In the document, Finnish officials set out how the Greek government and its privatization agency would authorize the transfer of assets to a holding company based in Luxembourg that would be used as security for states providing assistance.

The privatization agency would own all the shares in the asset holding company, although the shares would be held in custody by a third party. Since the holding company would be based in Luxembourg, it would operate under Luxembourg law.

Such a move would prove controversial in Greece, where the government has strongly rejected suggestions of offering land or company shares as collateral for future loans. It would in effect mean Greece, which plans to raise 50 billion euros from privatization by 2015, losing sovereignty over its assets.

"The Privatisation Agency is managing the AHC (Asset Holding Company) and can use AHC in a flexible way as one vehicle to securitize, manage, develop and privatize assets," reads the Finnish plan, dated June 23 and obtained exclusively by Reuters.

Greece, which passed a law in June to set up a privatization agency to handle the sale of state-owned companies, has so far taken few steps to implement the law, meaning it may miss a target agreed with the EU and IMF of raising 1.7 billion euros from privatizations by the end of September.

MULTIPLE USE ASSETS

As well as acting as a warehouse for Greek property, such a stake in a national phone company or port, the Luxembourg vehicle would ringfence assets so they are not used for other borrowing but instead kept as security for countries offering aid. The Finnish document explains:

"If the market value of the assets of AHC does not meet the collateral requirements or the Hellenic Republic defaults on its loan obligations to the EFSF, the ownership of the shares in custody immediately transfers to the relevant member states," it says, referring to the European Financial Stability Facility, the 440 billion euro bailout fund drawn up last year.

The Finnish plan also flags a possible securitization of the assets held in Luxembourg, using cash flow generated from an airport, for example, as security for loans.

"The asset securitization would make both the valuation and the liquidation of the assets much easier," write the authors of the confidential document, which has been circulated to euro zone finance ministries in the form of a "non-paper."

The proposal is among those being discussed by euro zone officials in conference calls in recent days to try to reach agreement on how collateral can be provided to Finland, and potentially other member states, in exchange for new loans.

Earlier this year, ECB board member Juergen Stark put a value on the country's assets, which include stakes in Athens' airport, a bank, two ports, and the country's main telephone company, of 300 billion euros ($423 billion).

Tapping this wealth will be difficult politically. Talk of selling state companies prompted protests by workers worried they could lose their jobs in any privatization. Militant union members at the country's main electricity producer have warned the government not to pursue a sale.

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Exclusive: SEC builds new tips machine to catch the next Madoff (Reuters)

By Sarah N. Lynch and Matthew Goldstein Sarah N. Lynch And Matthew Goldstein – Wed?Jul?27, 8:29?am?ET

WASHINGTON/NEW YORK (Reuters) – For more than three years, U.S. securities regulators investigated allegations of accounting fraud at a small telecom firm called China Voice Holding Corp, but could not make a case.

Then last November, they got an unexpected break. A Texas-based tax consultant doing work for a firm affiliated with China Voice contacted the U.S. Securities and Exchange Commission with information about suspicious money transfers she'd detected.

The call from Dee Dee Stone was quickly routed to a preliminary version of the SEC's new $21 million "Tips, Complaints and Referrals" or TCR Database, which the agency later fully deployed in March. Within 24 hours, Stone, a former Internal Revenue Service agent, got a call from an SEC attorney spearheading the China Voice inquiry.

Five months later, the SEC on April 29 sued several China Voice executives, claiming they had duped investors out of $8.6 million in a Ponzi scheme. Agency lawyers say without Stone's help, regulators may not have even discovered the scheme, let alone made a case so soon.

The alleged fraud at China Voice was small in the annals of Wall Street sins. But the SEC's response to Stone is an indication that after dropping the ball on Bernie Madoff, the nation's top securities cops are trying to modernize the way they handle tips and complaints about potential wrongdoing.

The TCR Database is the SEC's most significant response to its well-documented fumbling of early tips about Madoff's $65 billion fraud. The SEC's new Office of Market Intelligence, which last summer also forged a first-of-its kind partnership with the Federal Bureau of Investigation, is using the database as a key tool.

The changes are part of an effort by SEC Chairman Mary Schapiro to overcome the agency's reputation for being a step or two behind the bad guys. It is far too soon for the SEC to declare victory. But some of the agency's harshest critics notice a change.

Among them is Harry Markopolos, the Boston-based financial analyst and fraud investigator best-known for trying to alert regulators about problems with Madoff's operation. Markopolos said since the database went into operation, he has submitted three of his own tips. In all three cases, he heard back from an SEC attorney within days, or in one case, a few hours.

"Everything they should have done in the Madoff case they are now doing," said Markopolos. "They have done a fantastic job of reforming themselves."

In February 2009, Markopolos told the House Committee on Financial Services that the SEC's "investigative ineptitude and financial illiteracy" permitted Madoff's crimes to go on for so long.

PAPER, PENCILS & FAXES

It took the embarrassment of the Madoff scandal to drag the SEC into the 21st century when it comes to tracking tips and complaints.

Tips used to come via phone calls, e-mails, faxes and even handwritten letters into the SEC's 11 regional offices and Washington headquarters. Before the Madoff case, the SEC's Los Angeles office might receive a written complaint about a bad broker, for instance, and stuff the letter into a filing cabinet if it was deemed without merit. So, if later on a complaint about the same broker was sent to the SEC's Chicago office, staff there would have no easy way of knowing about the earlier tip and connecting the dots.

Sometimes, the only way an attorney could find out if someone had looked into a complaint would be to call all the other SEC offices.

"It was a sieve, basically," says Russ Ryan, a partner in the Washington law office of King & Spalding who spent a decade at the SEC before leaving in 2004. "It probably got better as I went along in my career, but I remember back when I first started there, it was a lot of paper and pencil type stuff."

Now with the TCR Database, once a tip or complaint is entered into the system, about 2,300 SEC employees can see it and add new information.

"All of the plumbing was brought into one place," said Thomas Sporkin, a nearly 19-year veteran SEC attorney in Washington, who oversees the agency's new Market Intelligence Unit and its 41-member team.

The database is emerging alongside a new program by the FBI's criminal profiling group in Quantico, Va. that is creating a series of behavioral composites to help agents investigate white collar crime.

The more systematic approach by the SEC and FBI comes in response to the growth and complexity of financial crimes in recent years. In the US government's 2010 fiscal year, the FBI's economics crime unit reports the bureau had 1,703 active securities and commodities fraud investigations, a 41 percent increase over the number of active investigations in 2008.

Over the past year, the amount of monetary penalties the SEC has imposed on wrongdoers has almost tripled, with high-profile cases against companies such as Goldman Sachs, Citigroup and Morgan Keegan for their roles in the crisis.

Sporkin's 41-member Market Intelligence Unit last month moved into new offices in Washington that look a little bit like a Wall Street trading floor, where they process more than 100 tips, complaints and referrals that come in each day.

The group's chief task is to ensure legitimate tips, like the one from Stone about China Voice, get routed to the right attorneys. The triage process begins with analyzing the information provided by tipsters, whistleblowers and self-regulatory organizations on an online questionnaire in the TCR Database portal.(https://denebleo.sec.gov/TCRExternal/index.xhtml)

The SEC is also trying to revamp the way it uses the raw data it gathers. Sporkin's team is working side-by-side with an FBI expert in financial crimes under a deal agreed to last August.

The FBI agent gets to look at all the tips about securities fraud as they come into Sporkin's team. For the FBI, the partnership offers the promise of faster criminal investigations. For the SEC, it's a chance to learn a trick or two from law enforcement.

Having an FBI agent embedded with the SEC "is really revolutionary," Sporkin said.

Other regulators are trying to set up their own FBI partnerships, including the Commodity Futures Trading Commission, which regulates the futures and over-the-counter derivatives market. The CFTC, which declined to comment, has also been closely studying the operation of Sporkin's team.

THE FBI EMBED

Jeffrey Horner, the FBI agent embedded with Sporkin's group, is an accountant who worked for audit giant PriceWaterhouseCoopers before joining the bureau in 2004.

Horner says he's not allowed to talk about specifics, but the nearly year-long partnership has led to new leads and bolstered existing FBI files.

"Some of the raw data that comes into the SEC, the (FBI) case agents may not be aware of," he said. "So plugging them in with the SEC and the information that the SEC has can be very valuable to an ongoing investigation."

FBI agent Horner is also sitting in on two SEC working groups examining micro-cap fraud and Chinese businesses that have done so-called reverse mergers with small U.S. shell companies. The FBI has opened its own broad investigation into reverse mergers and allegations of accounting irregularities.

Horner also uses the SEC's tips system to drill into areas of particular interest to the FBI. Right now, for instance, he is on the lookout for tips about high-yield investment scams as well as high-priority areas such as insider-trading and market manipulation.

The real test of the partnership -- and the effectiveness of the TCR Database -- will lie in the kind of cases the SEC and federal prosecutors file.

An independent analysis of the work of Sporkin's team could come when SEC Inspector General David Kotz conducts a planned audit of the Market Intelligence Unit's triage work. Kotz, who issued a scathing report on the SEC's failures in the Madoff affair, has called the new database an adequate response to ensure tips are "acted upon in a timely and appropriate manner."

Former SEC lawyers and securities attorneys wonder whether more agents need to be assigned to the SEC-FBI partnership.

"My sense is that there would be so many things going across that person's desk, I am not sure one person can manage it," said James Cox, a law professor at the Duke University School of Law.

Officials with the SEC and the FBI don't rule out an enhanced relationship. They note that before Horner was embedded with the SEC, the two agencies coordinated on major investigations, such as the probe into insider trading by hedge funds.

At the same time, officials say they are sensitive to law enforcement protocols prohibiting prosecutors and the FBI from sharing investigative materials, such as wiretapped conversations, with securities regulators. They say it's easier for the FBI and SEC to work hand-in-hand before an investigation gets going to avoid any defense allegations of improper collaboration or information-sharing.

REWARDING WHISTLEBLOWERS

Sporkin's group is a work in progress and the TCR Database has some limits. It can't yet be cross-checked against other internal databases. The system s not advanced enough to perform more sophisticated analysis or data-mining, such as cross-checks against trading activity, company filings or news feeds.

"It will be several years before we really see whether this new system is a success," said Bradley J. Bondi, a former SEC attorney who is now a partner with Cadwalader, Wickersham & Taft LLP. "But I think the new system is a step in the right direction."

It's a system Sporkin expects will become bigger and better over time, especially now that the SEC in May finalized rules for its own whistleblower program, rewarding individuals who provide the agency with a high-quality tip that leads to a successful enforcement action.

Stone's tip about the potential Ponzi scheme at China Voice came in November 2010, after she says she grew concerned about the number of complaints she was hearing from investors in China Voice and related partnerships.

On May 31, Stone, testifying before a U.S. judge in Dallas in the China Voice case, said she learned about the new whistleblower rule only after hiring an attorney in advance of her court appearance. Her attorney, Misty Gutierrez, declined to comment; Stone didn't return telephone calls to her consulting business, Number Crunchers.

Stone told U.S. District Judge Reed O'Connor she started reviewing the bank statements for China Voice and those related companies after hearing the complaints, and quickly concluded, "something was wrong."

She talked about the money transfers with a friend who also once worked for the IRS and agreed the math didn't add up. The next day, Stone said she called the SEC.

(Editing by Bill Tarrant)

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Exclusive: Fitch to decide on U.S. ratings outlook in August (Reuters)

NEW YORK (Reuters) – Fitch Ratings said on Wednesday it will decide next month whether the United States deserves to keep a stable outlook on its AAA credit rating, after it concludes a review of the country's economic and fiscal outlook.

David Riley, Fitch's main analyst for the United States, said the decision will take into account a final budget agreement in Washington to reduce the country's deficit in the medium- to long-term.

"To some extent we are a little bit on hold because we want to see what comes out from the current negotiations," Riley told Reuters in an interview.

"As soon as an agreement is reached and has been announced, we will incorporate that into our analysis and we'll make a comment on the U.S. sovereign rating and its outlook -- hopefully by the mid of August."

(Reporting by Walter Brandimarte; Editing by Chizu Nomiyama)

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Exclusive: EU calls emergency meeting as crisis stalks Italy (Reuters)

BRUSSELS (Reuters) – European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region's third largest economy.

European Central Bank President Jean-Claude Trichet will attend the meeting along with Jean-Claude Juncker, chairman of the region's finance ministers, European Commission President Jose Manuel Barroso and Olli Rehn, the economic and monetary affairs commissioner, three official sources told Reuters.

Van Rompuy's spokesman Dirk De Backer said: "It's a coordination, not a crisis meeting." He added that Italy would not be on the agenda and declined to say what would be discussed.

However, two official sources told Reuters that the situation in Italy would be discussed. The talks were organized after a sharp sell-off in Italian assets on Friday, which has increased fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis. A second international bailout of Greece will also be discussed, the sources said.

The spread of the Italian 10-year government bond yield over benchmark German Bunds hit euro lifetime highs around 2.45 percentage points on Friday, raising the Italian yield to 5.28 percent, close to the 5.5-5.7 percent area which some bankers think could start putting heavy pressure on Italy's finances.

Shares in Italy's biggest bank, Unicredit Spa, fell 7.9 percent on Friday, partly because of worries about the results of stress tests of the health of European banks that will be released on July 15. The leading Italian stock index sank 3.5 percent.

The market pressure is due partly to Italy's high sovereign debt and sluggish economy, but also to concern that Prime Minister Silvio Berlusconi may be trying to undermine and even push out Finance Minister Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit.

"We can't go on for many more days like Friday," a senior ECB official said. "We're very worried about Italy."

Monday's emergency meeting will precede a previously scheduled gathering of the euro zone's 17 finance ministers to discuss how to secure a contribution of private sector investors to the second bailout of Greece, as well as the results of the stress tests of 91 European banks.

GREECE

Greece is already receiving 110 billion euros ($157 billion) of international loans under a rescue scheme launched in May last year but this has failed to change market expectations that it will eventually default on its debt.

Senior euro zone officials worry that progress toward a second Greek bailout, which would also total around 110 billion euros, is not being made quickly enough and that the delay is poisoning investors' confidence in weak economies around the region.

"We need to move on this in the next couple of weeks. It's not a case of waiting until late August or early September as Germany is saying. That's too late and markets will make us pay for it," a top euro zone official told Reuters on Saturday.

German officials insist they too want to put together the second Greek bailout as quickly as possible, but the private sector's contribution is proving to be a major sticking point.

Germany, the Netherlands, Austria and Finland are determined that banks, insurers and other private holders of Greek government bonds should bear some of the costs of helping Athens. But more than two weeks of negotiations with bankers represented by the Institute of International Finance (IIF), a lobby group, have made next to no progress on agreeing a formula acceptable to all sides.

Initially talks focused on a complex French plan for private creditors to roll over up to 30 billion euros of Greek debt, buying new bonds as their existing ones matured. Around half of proceeds from Greek bonds maturing before the end of 2014 would be rolled over into very long-term debt while 20 percent would be put into a "guarantee fund" of AAA-rated securities.

But as that plan has floundered, Berlin has revived a proposal to swap Greek bonds for longer-dated debt that would extend maturities by seven years. Proposals to buy back Greek bonds and retire them have also been floated.

In a buy-back, the euro zone's bailout fund, the European Financial Stability Facility, might buy Greek bonds from the market, or the EFSF might lend Greece money to buy bonds. However, these schemes would require further changes to the EFSF's rules and would therefore have to go through national parliaments, an official source said.

SQUARE ONE

A senior euro zone official told Reuters on Friday that rather than progress being made in the talks with the IIF, as IIF managing director Charles Dallara has said, all sides were close to being "back to square one."

Dallara will attend the meeting of euro zone finance ministers in Brussels on Monday.

Since the euro zone's debt crisis erupted last year, the region's rich governments have aimed to limit it to Greece, Ireland and Portugal, which have signed up to bailouts totaling 273 billion euros -- a sum that is small compared to the financial resources of the zone as a whole.

Spain, commonly seen as the next potential domino in the crisis, has managed to retain its access to market funding through fiscal reforms. But because of the large sizes of the Spain and Italy, pressure on the euro zone would increase dramatically if those countries eventually needed financial assistance.

(Additional reporting by Francesca Landini in Milan and Gernot Heller in Berlin; Editing by Andrew Torchia)

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Exclusive: Treasury secretly weighs options to avert default (Reuters)

WASHINGTON (Reuters) – A small team of Treasury officials is discussing options to stave off default if Congress fails to raise the country's borrowing limit by an August 2 deadline, sources familiar with the matter said on Wednesday.

Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the U.S. government the authority to borrow more money.

But behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told Reuters.

Treasury has studied the following issues:

- Whether the administration can delay payments to try to manage cash flows after August 2

- If the U.S. Constitution allows President Barack Obama to ignore Congress and the government to continue to issue debt

- Whether a 1985 finding by a government watchdog gives the government legal authority to prioritize payments.

The Treasury team has also spoken to the Federal Reserve about how the central bank -- specifically the New York Federal Reserve Bank -- would operate as Treasury's broker in the markets if a deal to raise the United States' $14.3 trillion borrowing cap is not reached on time.

The U.S. government currently borrows about $125 billion each month. The Obama administration wants Congress to raise the limit by more than $2 trillion to meet the country's borrowing needs through the 2012 presidential election.

The contingency discussions, which have remained a closely guarded secret throughout weeks of negotiations with Congress over the debt ceiling, are being led by Mary Miller, Assistant Secretary for Financial Markets, who is effectively custodian of the country's public debt.

Miller's team has debated whether Obama could ignore Congress and order continued borrowing -- by relying on the 14th Amendment of the U.S. Constitution -- if it fails to raise the borrowing cap.

The fourth section of the 14th Amendment states the United States' public debt "shall not be questioned." Some argue the clause means the government cannot renege on its debts.

Obama dismissed talk of invoking the amendment on Wednesday. "I don't think we should even get to the constitutional issue," he said. "Congress has a responsibility to make sure we pay our bills. We've always paid them in the past."

HINT OF PLAN B COULD HURT TALKS

The White House declined to comment on the discussions at Treasury, but administration officials sought to tamp down talk of relying on the 14th Amendment.

There has been growing speculation in Washington in recent days that the administration could use the amendment to ignore the congressionally imposed limit on the amount of money the United States can borrow.

"Despite suggestions to the contrary, the 14th Amendment is not a failsafe that would allow the government to avoid defaulting on its obligations," said White House spokeswoman Amy Brundage.

Miller's team has discussed the Government Accountability Office's 1985 assessment that Treasury has the authority to prioritize payments in the event of a default -- an option Treasury officials have been wary of.

The administration's nightmare scenario is that investors panic at the prospect of a default, triggering a crisis that eclipses the 2008 financial meltdown. That could plunge the U.S. economy into another recession, something that could doom Obama's re-election prospects in 2012.

Some conservative Republicans have argued the Treasury can prioritize payments and manage a default. The administration wants to keep lawmakers focused on the August 2 deadline, and even a hint of a "Plan B" could lessen the urgency to strike a deal by then.

"As we have said repeatedly over the past six months, there is no alternative to raising the debt limit," Treasury spokeswoman Colleen Murray said when asked to comment on the Treasury discussions.

"The only way to prevent a default crisis and protect America's credit-worthiness is to enact a timely debt limit increase, which we remain confident Congress will do."

TREASURY OFFICIALS MUM

Obama meets leaders from both parties at the White House on Thursday as he seeks to get an agreement to cut trillions from the U.S. deficit, which Republicans have demanded in exchange for their support to raise the debt limit.

The fear of any loss of momentum in the debt and deficit talks is so great that even in their private conversations with former colleagues and investors, administration officials are refusing to admit to contingency discussions.

"There has to be contingency planning," said one former Obama administration official. "But they won't even tell me that."

That view was echoed by numerous former officials from the Clinton, Bush and Obama administrations.

"You have to have a backup plan. If you are relying on Congress to avoid the possibility of an Armageddon, you can't just bet on that," said Keith Hennessey, who headed the White House National Economic Council during President George W. Bush's administration.

In August, the Treasury will take in roughly $172 billion, but is obligated to make $306 billion in payments -- meaning it cannot pay about 45 percent of its bills without borrowing more money, according to the Bipartisan Policy Center, a Washington think tank.

That would force the administration to make some difficult choices, even though officials believe emergency measures will buy little time and cannot stave off an economic catastrophe.

OPTIONS "PRETTY UGLY"

If Treasury were to decide to delay some payments, one option could be to postpone a disbursement of more than $49 billion to Social Security recipients that is due on August 3.

It would be a politically explosive step but one that could allow the government to temporarily pay bondholders to try to avoid foreign investors dumping U.S. Treasuries and the dollar.

The administration has warned that any missed payments, including those to retirees, veterans and contractors, would be default by another name, and the Treasury team still has concerns that any contingency plan would prove unworkable.

Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are "pretty ugly."

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due -- a massive and difficult undertaking. Treasury makes about 3 million payments each day.

From their second floor offices in Treasury, Miller and Fiscal Assistant Secretary Richard Gregg, are the lieutenants Geithner is relying on if the administration's first option of negotiating a deal with Republicans falls apart.

"She's dealing with this day in and day out," said a former Treasury official.

The former official said Treasury aides were "speaking with Congress on a daily basis," giving them the latest updates on receipts and when default could occur.

The source said White House Chief of Staff Bill Daley and other officials regularly ask Miller for information.

"Every day they talk about the debt ceiling. The night before, they get the most recent numbers," the source said.

Michael Barr, a former Treasury official who worked closely with Miller, said he spoke with Miller and Gregg a month ago.

"They were exploring if there were any legal and practical alternatives. It was not obvious to them that the president has the legal authority to pick and choose who gets paid," he said.

Barr added: "It is not obvious that even if they had legal authority, that as a practical matter you can do it."

As recently as June 21, Miller told a group of sovereign debt holders in London that there is no Plan B and assured them that the debt limit would be raised before August 2.

Publicly, Treasury has maintained there is no contingency plan. "Our plan is for Congress to pass the debt limit," Geithner said late in May. "Our fall-back plan is for Congress to pass the debt limit, and our fall-back plan to the fall-back plan is for Congress to pass the debt limit."

(Additional reporting by Rachelle Younglai, Tim Reid, and Caren Bohan Editing by Ross Colvin and Jackie Frank)

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Exclusive: S&P to deeply cut U.S. ratings if debt payment missed (Reuters)

NEW YORK (Reuters) – The United States would immediately have its top-notch credit rating slashed to "selective default" if it misses a debt payment on August 4, Standard & Poor's managing director John Chambers told Reuters.

Chambers, who is also the chairman of S&P's sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated 'D' if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.

"If the U.S. government misses a payment, it goes to D," Chambers said. "That would happen right after August 4, when the bills mature, because they don't have a grace period."

Fears of a technical default have been rising after budget negotiations between Democrats and Republicans fell apart in Washington earlier this week. Even a brief default by the United States would immediately increase the country's borrowing costs, weighing on the fragile economic recovery and eroding the dollar's status as a reserve currency.

On August 4, the Treasury Department is due to pay off $30 billion in maturing short-term debt.

With the debt talks stalled, new ideas are surfacing such as prioritizing debt payments. But Treasury Secretary Timothy Geithner warned lawmakers on Wednesday that such a move would still cause investors to shun U.S. Treasury securities.

Geithner said that because the United States now borrows roughly 40 cents of every dollar it spends, prioritizing payments with no debt limit increase would require cutting 40 percent of all government expenditures.

S&P is not the first agency to say it will downgrade the United States if a payment is missed. Rival credit rater Moody's on June 2 was the first to say it would downgrade the United States shortly after a possible ceiling-related default, but not as deeply -- to the Aa range.

Chambers insisted that the likelihood of a U.S. default is "extremely low," as S&P expects a last-minute increase to the country's debt ceiling just like it has happened for more than 70 times since the 1960s.

He also noted a default on U.S. Treasuries -- a benchmark against which all other debt is measured -- would dwarf any worries about U.S. credit ratings as global markets would crumble.

Chambers made clear, however, that S&P is more worried about the ability of the U.S. government to meaningfully cut its deficit over the next two years, with presidential elections in 2012 making a bipartisan agreement much tougher.

S&P is so far the only of the big-three credit ratings agencies to revise the outlook on the U.S. AAA credit rating to negative. It has said it sees a one-in-three chance of a downgrade within the next two years.

Moody's Investors Service and Fitch Ratings have expressed concern about the pace of budget negotiations in Washington, but still maintain a stable outlook on U.S. ratings.

Yet they have been more vocal about the risks of a "technical default" in August. Fitch said earlier this month it would cut U.S. issuer ratings to "restricted default" if the government misses a more substantial debt payment on August 15.

The U.S. Treasury reached the country's $14.3 trillion debt limit on May 16 and has been making use of extraordinary measures to keep servicing its debt since then. It will run out of alternatives to avoid a default on August 2, Geithner has said.

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